Bush Signs Strict Business Reform Law
President Bush signed far-reaching accounting reform legislation into law Tuesday as corporate executives, auditors, lawyers and Wall Street analysts braced for a significant change in the way they do business.
At the White House’s carefully orchestrated signing ceremony, Bush stressed the punitive aspects of the most far-reaching business reforms since the Depression--measures that appeared all but dead just a few months ago.
“No more easy money for corporate criminals, just hard time,” Bush said.
But while the prospect of tough prison sentences for white-collar criminals has captured the spotlight, experts say the law’s most sweeping changes concern corporate governance.
Lawyers, for instance, now will have increased responsibility to inform corporate boards of directors of misdeeds. And the boards’ audit committees must operate independently of management.
Like much of the law, the audit committee requirements will be spelled out in detail by the Securities and Exchange Commission in regulations that could take three to six months to complete. But the requirements are so substantial that some companies already are scouting for qualified audit committee members.
“Given the things that have to be done, people need to start immediately to comply,” said John Harkins, a partner in the Philadelphia law firm of Harkins Cunningham who specializes in corporate litigation and governance. “Companies can’t wait until the last minute.”
Finding qualified financial experts, such as public accountants, auditors or controllers, will be hard enough. But finding people willing to devote the time necessary to meet the new duties could also be a challenge, he said.
“Audit committee members are going to have to work a lot harder. There are a lot of obligations, and to spend the amount of time that needs to be spent to do what has to be done means you are going to have to look long and hard on whether you want to be on that committee,” Harkins said.
In recent weeks, as the reform bill worked its way through Congress, Bush and lawmakers rallied behind it as a way to restore investor confidence that had been badly shaken by a spate of business scandals. But the financial markets sent a mixed signal Tuesday as the measure became law.
The Dow Jones industrial average lost about 32 points, while the Nasdaq and Standard & Poor’s indexes registered slight gains. Analysts welcomed the results as a sign that the market may be stabilizing.
Whether the new law fulfills its promise of restoring integrity to financial markets will depend heavily on the SEC, which has been strongly criticized by some for not moving aggressively enough to root out corporate misdeeds.
The bill’s congressional sponsors promised to keep an eye on the agency. “We’ll be watching very closely,” Sen. Paul S. Sarbanes (D-Md.), the bill’s chief architect, said after attending the signing ceremony.
Investor groups said they also will be monitoring the bill’s implementation.
“This new law has the potential to dramatically improve the quality and independence of the audits of public companies and, in so doing, to increase the reliability of corporate disclosures,” said Barbara Roper, director of investor protection for the Consumer Federation of America. “But it will only live up to that potential if everyone does their part, starting with [SEC Chairman] Harvey Pitt and the SEC.”
The law gives the SEC 90 days to appoint the five members of a new, independent board that will oversee the accounting industry. Reform advocates have touted this board as essential to more effectively policing the accounting industry and preventing the type of accounting abuses that have surfaced in recent months.
Pitt said Tuesday that the SEC will “do our utmost to meet all timetables.”
The bill establishes tougher criminal penalties for white-collar crimes, including quadrupling, to 20 years, the maximum prison sentence for mail and wire fraud. It also establishes a new crime of securities fraud, punishable by up to 25 years in jail.
However, experts predicted that the law’s longer sentences for corporate crimes would have little, if any, effect on the behavior of officers, directors and consultants who are inclined to cross the line. Also, it is unclear how many more cases federal investigators and prosecutors will be able to take to trial, even with added resources.
“Another $100 million is like throwing nickels at the system,” said Henry Pontell, a criminology professor at UC Irvine. “The real question is does the system have the capacity to push cases to that final stage? That’s always been the Achilles’ heel of the criminal justice system when it comes to processing white-collar crime cases.
“When you look at the SEC budget compared to what they spend on drugs, it’s a small fraction, and the amount of work that’s required to do these kinds of cases is preposterous.”
The law is expected to hit small firms harder than big ones.
“From a smaller, emerging-growth company perspective, it will probably make it more difficult to attract qualified board directors,” said Mark Heesen, president of the National Venture Capital Assn.
“With the greater exposure to liability for directors that’s in this bill, you could see some people who are already squeamish about sitting on boards saying, ‘Is it really worth it?’ ”
As a result, he said, small companies may have to spend more time and resources recruiting directors, and they may have to settle for less-qualified directors.
Small companies already were reeling from increases in insurance premiums for director and officer coverage in the wake of recent accounting scandals, Heesen said. The increased liability the law places on officers and directors is likely to push such costs even higher, he said.
But he noted that the national focus on corporate governance already had spurred many boards to pay closer attention to the companies they supervise.
“The law has had a very positive impact in that, even before it was signed, the idea that Congress was out there debating these issues made it clear that things had to change,” Heesen said.
“Audit committees, compensation committees had to change what they had been doing. From our angle, that’s not a bad thing.”
Regulatory-wary Republicans, including Bush, initially had resisted some of the law’s key measures, which were sparked by the financial collapse late last year of Enron Corp. But the revelations in late June of accounting irregularities by WorldCom Inc. roiled the markets, rekindled interest in corporate reform and ultimately created virtually unanimous support in Congress for a tough measure.
Tuesday, Bush urged the Democratic-led Senate to take additional action and pass a pension reform measure similar to the one approved by the Republican-controlled House earlier this year.
Senate leaders plan to take up the measure in September. It would give employees new rights to sell company stock and diversify investments in their 401(k) retirement accounts.
Democrats also made it clear that they will keep up the pressure on the corporate reform issue. Rep. John J. LaFalce of New York, the top Democrat on the House Financial Services Committee, said he hopes Bush, “while a late convert to the effort of producing substantial and meaningful reform,” supports a hefty budget increase for the SEC.
Political analysts differed on whether the new law will help Bush and other Republicans blunt Democratic criticism that they were not aggressive enough on corporate corruption.
At the bill-signing, “Bush looked like the proud father of corporate reform,” said Larry Sabato, a political science professor at the University of Virginia. But, he added, “it’s not enough with the November election looming. Bush needs a stream of favorable developments and headlines about CEO crooks being arrested, the economy improving and the market recovering.”
Patrick Basham, senior fellow for the libertarian Cato Institute, said Bush now has “sufficient cover” to remain optimistic about the midterm elections and his own reelection chances in 2004.
And a CNN/USA Today/Gallup poll released Tuesday suggested that Democrats have only a slight edge over the GOP on the issue of corporate responsibility.
After Bush signed the bill, AFL-CIO President John Sweeney led a rally of union members near the New York Stock Exchange, denouncing “corporate pirates” and vowing to push for pension reforms and other bills to protect workers and investors.
“The sad truth is that American consumers can shop with more assurance of quality and safety at their corner grocery store than American investors can shop for equities in our stock market,” Sweeney told the crowd.
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Bill Highlights
* Stiffens penalties for white-collar crimes, including making securities fraud punishable by up to 25 years in prison
* Makes destruction of audit documents a felony
* Increases maximum criminal fines for individuals and companies to $5 million and $25 million
* Prohibits retaliation against corporate whistle-blowers
* Requires quick corporate disclosure to the SEC of any information that may affect financial statements
* Increases Securities and Exchange Commission enforcement budget by 75% for next fiscal year
* Restricts accounting firms’ ability to perform consulting services to companies they audit
* Requires corporate officials to personally certify the accuracy of company reports with the threat of civil and criminal penalties
* Creates an oversight board to set standards and review public companies’ audits
* Bans corporate loans to executives
Sources: Bloomberg News, House Committee on Financial Services
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Times staff writer James Gerstenzang contributed to this report.
